FDIC To Restrict Interest Rates Of Troubled Banks

When I read this news, the first bank came to my mind is Washington Mutual.

The bank announced on September 22, 2008 that it has increased the yield of WaMu Online Savings Account to 4.00%. Back then, everybody knows WaMu was fighting for its survival, so the rate increase could very well be seen as a desperate move to strengthen its capital basis when everybody else was cutting rates. Two days later, on September 25th, WaMu was bought by Chase.

4.00% was good, but nobody got to enjoy it. Now looking back, the last minute rate increase by WaMu could be a sign how bad shape the bank was in.

Anyway, the FDIC today proposed a regulatory change that will prohibit banks with weak capital basis from making excessive interest rate offers. According to the proposal, the new rule

requires the FDIC to prevent banks that are less than Well Capitalized from soliciting deposits at interest rates that significantly exceed prevailing rates. The FDIC’s current regulation ties permissible interest rates paid by these banks on deposits solicited nationally to the comparable maturity Treasury yield, and ties permissible interest rates on deposits solicited locally to undefined prevailing local interest rates.

The proposed regulation would define nationally prevailing deposit rates as a direct calculation of those national averages, as computed and published by the FDIC based on data available to it. Reliance on the Treasury yields in the regulation would be discontinued. In recognition of the blurring of local deposit market boundaries brought about by the Internet and other innovations, the proposed regulation would also establish a presumption that locally prevailing deposit rates equal the national rates published by the FDIC. This presumption could be overturned by evidence presented by banks to the FDIC.

What do you think of the proposal?

On one hand, less Well Capitalized banks are likely in no position to pay excessive interest rates, even though by doing so they may help them attract more savers and, thus, improve their capital positions. However, down the road, if there’s no fundamental changes at these banks, they could face the same facts as WaMu did. On the other hand, if deposit rates acrosee the nation are all tied to the nationally prevailing deposit rates published by the FDIC, could other banks with sound capital positions become less willing to offer competitive rates?

Chitika

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[…] early this year, the FDIC took up the issue and proposed a regulation that will prevent banks in bad financial shape from offering excessive interest rates. The proposal wants to set an upper limit on interest rates weak banks can provide to its existing […]